Defining how much risk someone is willing to take can be difficult. But in the investment world it’s critical.
Fear of risk keeps a lot of people away from investing their money, leaving them at the mercy of the banks and the people at the Federal Reserve. The Fed has kept interest rates near zero for years, hoping that low rates will cause a rebound in the economy. The downside of this policy is that traditional savings methods (saving accounts, CDs, buy & hold Treasuries) yield almost no growth.
Investors who are unsure of their risk tolerance and those who completely misjudge it are never quite sure if they are properly invested. Fearing losses, they may put too much of their funds into “safe” investments, passing up chances to grow their money at more reasonable rates. Then, fearing that they’ll miss all the upside potential, they get back into more “risky” investments and wind up investing too aggressively. Then when the markets pull back, they end up pulling the plug, selling at market bottoms, locking in horrible losses, and sitting out the next market recovery until the market “feels safe” again to reinvest near the top and repeating the cycle.
There is a new tool available that help people define their personal “risk number.”
What is your risk number?
Your risk number defines how much risk you are prepared to take by walking you through several market scenarios, asking you to select which scenarios you are more comfortable with. Let’s say that you have a $100,000 portfolio and in one scenario it could decline to $80,000 in a Bear Market or grow to $130,000 in a Bull Market, in another scenario it could decline to $70,000 or grow to $140,000, and in the third scenario it could decline to $90,000 or grow to $110,000. Based on your responses, to the various scenarios, the system will generate your risk number.
How can you use that information?
If you are already an investor, you can determine whether you are taking an appropriate level of risk in your portfolio. If the risk in your portfolio is much greater than your risk number, you can adjust your portfolio to become more conservative. On the other hand, if you are more risk tolerant and you find that your portfolio is invested too conservatively, you can make adjustments to become less conservative.
Finding your risk number allows you to align your portfolio with your risk tolerance and achieve your personal financial goals.
To find out what your risk number is, click here .
Arie J. Korving, a CERTIFIED FINANCIAL PLANNER™ professional, has been delivering customized wealth management solutions to his clients for more than three decades. Prior to co-founding Korving & Company, he was First Vice President with UBS Wealth Management and held management positions with General Electric.